Section 501(c)(3) Dissected: IRS Issues Detailed Guidance on Exempt Purposes

On March 17, 2023, the IRS Exempt Organizations and Government Entities Division published two Technical Guides: (1) TG 1 Instrumentalities of the United States, Government Corporations, and Federal Credit Unions; and (2) TG 3-3 Exempt Purpose, Charitable IRC 501(c)(3).

Given its substance and magnitude, TG 3-3 will be addressed first here.

TG 3-3 Exempt Purpose, Charitable IRC 501(c)(3)
TG 3-3, a 59-page gem, provides guidance on, basically, the meaning of exempt purposes described in section 501(c)(3) of Title 26 of the Internal Revenue Code (“Code”). In this regard, section 501 of the Code affords exemption from federal income tax to (among other organizations)

Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
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The Righteous Stand Bold Like A Lion | Bostock, Religious Organization Employers, And Title VII

This Insights blog addresses the aftermath of the monumental U.S. Supreme Court opinion of Bostock v. Clayton County, 140 S.Ct. 1731 (June 15, 2020) and the ongoing collision of the right to religious freedom enjoyed by religious organization employers and the civil liberties of individual employees codified in Title VII of the Civil Rights Act of 1964.

Bostock v. Clayton County, in Brief
In Bostock, the Supreme Court held that Title VII’s prohibition of discrimination in employment because of an employee’s “sex” includes a prohibition of discrimination based on the employee’s sexual orientation, including homosexuality or transgender. Justice Gorsuch, writing for a majority of the high Court, opened the opinion with these words:

Sometimes small gestures can have unexpected consequences. Major initiatives practically guarantee them. In our time, few pieces of federal legislation rank in significance with the Civil Rights Act of 1964. There, in Title VII, Congress outlawed discrimination in the workplace on the basis of race, color, religion, sex, or national origin. Today, we must decide whether an employer can fire someone simply for being homosexual or transgender. The answer is clear. An employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex. Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.

The Court in Bostock, noted the statutory exception for religious organizations: “As a result of its deliberations in adopting the law [Title VII], Congress included an express statutory exception for religious organizations. § 2000e-1(a).” Id. Notably, no “religious corporation” employer was involved in Bostock, and the Court recognized as much in conclusion: “So while other employers in other cases may raise free exercise arguments that merit careful consideration, none of the employers before us today represent in this Court that compliance with Title VII will infringe their own religious liberties in any way.” Id. (emphasis added).
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Church Inquiries And Examinations By The IRS | A Look At Section 7611 And Its Exceptions

IRS Inquiries and Examinations, Generally – Sections 6201 and 7602. Generally, the IRS is authorized and required by 26 U.S.C. § 6201(a) “to make the inquiries, determinations, and assessments of all taxes” imposed by the Internal Revenue Code.

To execute on that requirement, Congress, via section 7602, granted the IRS broad latitude to issue summonses “‘[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax …, or collecting any such liability.’” United States v. Clarke, 573 U.S. 248, 250 (2014) (quoting 26 U.S.C. § 7602(a)). The IRS has the authority to issue summonses to the subject taxpayer and to third parties who may have relevant information. See 26 U.S.C. § 7602(a)(2); Standing Akimbo, LLC v. United States, 955 F.3d 1146, 1154 (10th Cir. 2020). If a person or entity fails to comply with a summons, the IRS can bring an enforcement proceeding in a district court. 26 U.S.C. § 7604.

The IRS must have a good faith basis for issuing a summons under section 7602. To determine if a good faith basis exists, the courts evaluate these four factors: (1) whether the investigation will be conducted pursuant to a legitimate purpose, (2) whether the inquiry may be relevant to the purpose, (3) whether the information sought is not already within the IRS’s possession, and (4) whether the administrative steps required by the Internal Revenue Code have been followed. See United States v. Powell, 379 U.S. 48, 57-58 (1964).

Church Inquiries and Examinations, Section 7611. Section 7611 of the Code provides a different and unique statutory regime for inquiries and examinations of churches. Section 7611 restricts those inquiries and examinations, including the IRS’s ability to examine “church records,” and provides a detailed process for when and how those examinations may occur. See 26 U.S.C. § 7611(a), (h) (defining “church records” as “all corporate and financial records regularly kept by a church, including corporate minute books and lists of members and contributors.”). Under section 7611, the IRS may begin a church tax inquiry only if: (A) reasonable belief requirements and (B) specific notice requirements have been met.

Reasonable Belief Requirements. The “reasonable belief” requirements are met “if an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church—(A) may not be exempt, by reason of its status as a church, from tax under section 501(a), or (B) may be carrying on an unrelated trade or business (within the meaning of section 513) or otherwise engaged in activities subject to taxation under this title.” Id. at § 7611(a)(2)-(a)(2)(B).
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Florida Sales Tax On Ticket Sales For The Sunshine State’s Nonprofits

Sales tax . . . A (if not the most) commonly overlooked tax for nonprofit organizations. This Freeman Law Insights blog focuses on sales tax regime applicable to “admissions” collected by or for nonprofit organizations in the State of Florida.

General Rule. The state of Florida imposes a tax on “admissions,” which is defined as the net sum of money for admitting a person to any place of amusement, sport, or recreation, including theaters, outdoor theaters, shows, exhibitions, games, races, or any place where charge is made by way of sale of tickets. See Fla. Stat. §§ 212.02(1), 212.04(1)(b). The tax is required to be collected by every person who exercises the privilege of selling or receiving anything of value by way of admissions. Id. § 212.04(1)(a), (b).

Exception for 501(c)(3) Organizations. No tax is levied on dues, membership fees, and admission charges solely imposed by a not-for-profit sponsoring organization. See id. § 212.04(2)(a)(2); Fla. Admin. Code Ann. § 12A-1.005(2)(f). To receive this exemption, the sponsoring organization must qualify as a not-for-profit entity under I.R.C. § 501(c)(3). Fla. Stat. § 212.04(2)(a)2.; Fla. Admin. Code Ann. § 12A-1.005(2)(f).

Co-Promotion of Events. In Fla. Tech. Assistance Advisement No. 09A-051 (Oct. 8, 2009) the Florida agency held that an event co-promoted by a governmental body and a non-profit organization did not qualify for exemption because the governmental body is not a qualified organization under section 501(c)(3) of the Internal Revenue Code. The agency noted:

[T]he event was not solely sponsored by the Foundation, and the admissions were not solely imposed by the Foundation. Rather, as expressed in the agreement . . . , both parties were responsible for imposing and collecting the ticket charges regarding this issue. Therefore, since the exemption must be narrowly construed against the taxpayer seeking the exemption, the event in question does not qualify for the exemption found in Section 212.04(2)(a)2.a., F.S.

Agency Liability for Tax on Admissions. Under the Florida Administrative Code:

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Texas Law Update: Statute Of Limitations, The Discovery Rule, And Fraudulent Concealment

On January 13, 2023, the Texas Supreme Court issued its opinion in Marcus & Millichap Real Estate Investment Services of Nevada, Inc. v. Triex Texas Holdings, LLC, __ S.W.3d __, 2023 WL __ (Tex. Jan. 13, 2023) (per curiam) (“Triex”). The opinion addresses the discovery rule and fraudulent concealment, being legal principles used by litigants to extend the statute of limitations for what would be a stale claim. Importantly, the Triex opinion adds color to the Texas Supreme Court’s opinion of Berry v. Berry, 646 S.W.3d 516 (Tex. 2022) (“Berry”). In Berry, the Court brought Texas law back to plumb on the subject of limitations and the discovery rule. In Triex, the Court leans on Berry and reaffirms its key principles of law. This Insights blog aims to capture the key points from both.

A. Purposes, Burdens of Proof, and Accrual of Statutes of Limitation

Statutes of limitations exist to compel the assertion of claims within a reasonable period. “‘It is based on the theory that the uncertainty and insecurity caused by unsettled claims hinder the flow of commerce.’” Computer Assocs. Int’l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455 (Tex. 1996) (quoting Safeway Stores, Inc. v. Certainteed Corp., 710 S.W.2d 544, 545 (Tex.1986)).

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Employer Liability for Acts of Employee

Employer Liability for Acts of Employee | Texas Supreme Court Revisits Vicarious Liability, the “Come-And-Go” Rule, and the “Special-Mission” Exception Share this Article

On December 30, 2022, the Texas Supreme Court issued its opinion in Cameron International Corporation v. Martinez, __ S.W.3d __, 2022 WL __ (Tex. Dec. 30, 2022) (per curiam) (“Cameron”). The opinion addresses vicarious liability, the “coming-and-going rule”, and the special-mission exception to that rule, all being important legal concepts for any employer to appreciate.

The issue in the case was whether an oilfield worker acted within the course and scope of his employment when he was involved in a deadly car accident on the way back to a worksite after having dinner with his supervisor and stopping to purchase personal necessities for the worksite.

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Yeah, Science! IRS Issues Guidance Section 501(c)(3) Scientific Organizations

In the Netflix series, Breaking Bad, character Jesse Pinkman exclaimed, “Yeah, Science!!” as his meth-lab mentor, Walter White, displayed how chemistry can be used to hone their joint venture. While the activity in which they were engaged may have been “scientific,” I doubt that activity would qualify as “scientific” as that term is used in section 501(c)(3), Title 26 of the Internal Revenue Code.

Under section 501(a) of the Code, an organization described in subsection 501(c) shall be exempt from federal income taxation. Organizations qualified under section 501(c)(3) include organizations organized and operated exclusively for, among other listed things, religious, charitable, educational, and scientific purposes.

The Treasury Regulations (26 C.F.R. § 1.501(c)(3)-1(d)(5)) provides a lengthy definition and explanation of the term “scientific” as used and intended in section 501(c)(3). In a nutshell, a scientific organization must be organized and operated in the public interest. Research, for example, must be for the public interest and not the type ordinarily carried on as an incident to commercial or industrial operations. Research may qualify under section 501(c)(3) if: (a) the results are made available to the public on a nondiscriminatory basis; (b) the research is performed for the United States, or any of its agencies or instrumentalities, or for a State or political subdivision thereof; or (c) the research is directed toward benefiting the public.

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Correction to APA Non-Compliance | IRS Issues Proposed Regulations for Syndicated Conservation Easements

We have been heavily involved in advising on and defense of conservation easement charitable contributions authorized under section 170, Title 26 of the Internal Revenue Code. Whether in formation of compliant arrangements or in defense of allegedly tax non-compliant transactions, Freeman Law has seen or reported on just about every issue that can be dug up from the Code or the related Treasury Regulations. See Freeman Law Insights blog archives for Conservation Easements or search “conservation easements” on our Insights blog.

In early November 2022, Freeman Law—in its ever-timely Tax Court in Brief blog—provided a focused report on the pivotal syndicated conservation easement opinion from the U.S. Tax Court in Green Valley Investors, LLC v. Comm’r.

Since I manage the Tax Court in Brief blog for the Firm, I can report that my colleague, Matthew Roberts, enthusiastically accepted the blog assignment (as he does any time I submit a Tax Court blog assignment to his care). Based on review of Green Valley, Mr. Roberts concluded that the Tax Court found that the IRS Notice 2017-10 is a legislative rule that was improperly issued by the IRS without notice and comment as required under the Administrative Procedures Act, 5 U.S.C. §§ 551-559. Mr. Roberts keenly noted that, according to the U.S. Tax Court, Notice 2017-10 must be set aside under the APA, thus rendering the penalties that the IRS was assessing pursuant to 26 U.S.C. § 6662A unlawful.

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Taxation Of IRA Distributions | The 60-Day Rollover Requirement And A Fraud Exception

On October 2022, I blogged about What happens to a loan taken against a qualified retirement plan when the plan terminates or employment is terminated? That blog addressed recently-effective Treasury Regulations that provided some breathing room for taxpayers with loans outstanding on a qualified employment retirement plan when the plan or the taxpayer’s employment terminates.

In a Private Letter Ruling issued by the IRS on November 4, 2022, the IRS addressed a situation where a taxpayer failed to comply with the 60-day rollover rule for excluding from gross income distributions received from an individual retirement account (IRA). The taxpayer requested a waiver of the 60-day requirement because the taxpayer’s failure was allegedly due to fraud.

Private Letter Rulings, Generally. A private letter ruling is a written statement issued by the IRS to a particular taxpayer that interprets and applies tax laws to the taxpayer’s represented set of facts. A PLR is issued in response to a written request submitted by a taxpayer. PLRs are specific to the issues presented, and usually, the PLR will include a disclaimer of application to any issue or statute not specifically addressed by the PLR. PLRs are directed only to the taxpayer who requested it. Thus, under section 6110(k)(3) of the Code, a written determination may not be used or cited as precedent. See also IRS Procedures, Frequently Asked Questions under Code, Revenue Procedures, Regulations, Letter Rulings, “How would I obtain a private letter ruling?

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Some Good Deeds Do Go Punished: Private Foundation Self-Dealing Tax Consequences and Considerations

Over 15 years of advising nonprofit organizations, I have learned that, sometimes, “good deeds do go punished.”  This can be especially true when a private foundation, or those in its management, engage in transactions intended and designed to advance an exempt purpose but in reality constitute an act of self-dealing as technically defined by the Internal Revenue Code.

Earlier this year (good ol’ 2022), I published a blog about the IRS-issued Guidance on Self-Dealing Rules for Private Foundations. That blog provides the what-is and why-is for self-dealing matters. This Insights blog dives deeper into and hits on a number of tax and governance consequences and considerations for the private foundation that may have engaged in (and that the foundation’s managers may have authorized) one or more self-dealing transactions in a particular tax year.

Self-Dealing Taxes. Each payment involved in a transaction that constitutes a self-dealing transaction may be treated as a separate act of self-dealing. Section 4941 of the Code imposes four separate and distinct taxes on each act of self-dealing.

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What Happens To A Loan Against A Qualified Retirement Plan When The Plan Or Employment Is Terminated?

This blog provides an overview of potential financial and tax options or consequences to a participant of a qualified retirement plan when the participant has an outstanding qualified plan loan from the account when the plan or employment terminates.

Plan Loan Offset, Generally. A plan loan offset occurs when, pursuant to the plan loan terms, a participant’s benefit is reduced to repay the qualified plan loan.  The terms governing the plan loan to a participating employee may provide that, upon termination of the plan, employee’s account balance is automatically offset by the amount of any unpaid loan balance to repay the outstanding loan. “[T]he term ‘plan loan offset amount’ means the amount by which the participant’s accrued benefit under the plan is reduced in order to repay a loan from the plan.” See 26 U.S.C. § 402(c)(2)(C)(iii).

Tax Cuts and Jobs Act of 2017 (eff. Jan. 6, 2021). These final regulations (26 C.F.R. § 1.402(c)-3) extended the deadline to repay a qualified plan loan offset when an employee’s employment is terminated or if the plan terminates. Previously, there was generally a 60-day window to pay the outstanding balance. The Treasury Regulations extend that time frame until the due date of the employee’s federal income tax return, including filing extensions, but a 60-day period still exists for plan offsets that is not a qualified plan loan offset amount.

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Church Status: Can (And Should) Your Religious Nonprofit Seek Church Status With The IRS?

Can and should your religious organization seek church status with the IRS? A look at a few pros, cons, and due diligence considerations.

Through over 15 years of representing nonprofit organizations, one thing is for certain–there are infinite exempt purposes that may be served within the confines of section 501(c)(3) of the Internal Revenue Code. No matter how similarly situated for tax purposes, every tax-exempt or nonprofit organization has unique attributes of governance, operations, and focus. The same is certainly true in the religious organizations space. As my long-time religious law mentor once said, “God loved us so much there is a church, synagogue, mosque, temple, or other place of worship available for every individual to pray and seek peace.”

Some of my nonprofit clients exist primarily to advance religious purposes—religion is a core and fundamental focus of all things organizational and operational for those organizations. That focus does not, however, make those organizations a “church,” as that term is defined (or considered) by the Internal Revenue Service. As in any organization structure, there are advantages and disadvantages to church status.

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